Every Christmas, our family heads to Belfast to see the in-laws and eat gluttonously, drink copiously, argue endlessly, and fill the boot dementedly before we head down South again. The difference in prices between the Republic and Northern Ireland is remarkable, particularly at Christmas when everyone is buying more of everything.
Choosing to shop in the North makes you richer.
Brexit will not change this. In fact, Brexit may make the price differences yet more clear-cut.
If sterling were to weaken against the euro next year because of a nasty shock during negotiations, a political change in London, or simply because European rates move up quicker than expected, Southerners would be mad not to think of the North as a giant discount store.
It is a “constitutional Lidl” that’s just up the road.
But before focusing on the bargains that are available up North, it’s worth considering just how expensive Ireland is relative to countries around the world.
To compare prices between Ireland and the rest of Europe, I’m going to construct an Irish version of the famous Big Mac Index. The Pint of Guinness Index is just a boozy version. It compares prices of Guinness in Irish pubs all over the world from Tokyo to Bucharest, Lisbon to Lima.
In a world dominated by financial markets where exchange rates can move up and down for no apparent reason, the Big Mac Index was conceived by the Economist magazine to try to assess whether exchange rates between countries were at their “correct” level.
The economic theory behind this is called “purchasing-power parity”. This means that, over the long term, the exchange rate between two countries should move toward equalising the prices of identical goods in two countries.
For the Economist, the Big Mac was a perfect identical product sold all over the world at McDonald’s franchises – a proxy for the real prices in each country.
So, if the price of a Big Mac in America was $6 and was $3 in France, the Big Mac Index would imply that the euro was 50% undervalued against the dollar. As a result, in the long term, the euro should rise against the dollar to eliminate this real underlying price difference.
Now let’s put Ireland into the frame.
If the Big Mac is America’s most conspicuous cultural export, bringing a version of America to the farthest parts of the globe, the ubiquitous Irish pub must be our equivalent.
It projects an ersatz “Irish-ness” to the most remote places. Some people might get sniffy about the replica, made-to-order Irish pubs, but it is the product Ireland exports everywhere.
Therefore, for an Irish view of the world of economics, the same logic should apply for pints of Guinness as for Big Macs. If the pint of Guinness is way out of whack between two countries with differing exchange rates, then there must be something wrong.
What happens to the price of a pint of Guinness, brewed in Dublin, when it leaves Dublin? Remember, economic theory states that because of transport costs, the price of goods should increase the farther away from the home country it travels.
But in almost all cases, the price of a pint of Guinness gets cheaper when it leaves Ireland. In some cases, the difference is enormous. In Spain and Greece, Guinness is 34% cheaper than it is here. In Germany, a pint of stout is 15% cheaper and in Austria 25% cheaper.
That’s only within the EU. Compare prices between Ireland and Singapore, Peru, Japan, and Russia, and you can see where Ireland stands on the global league of expensiveness or cheapness. It’s not a pretty sight.
However, all these places are too far away to avail of the arbitrage between the prices. We can’t go shopping in Peru. But we can go up North.
Taking the political rhetoric about the “all-island economy” at face-value, we can treat the island of Ireland as two economic zones within the one economy. We have the euro zone here and the sterling zone up North.
If we apply the Pint of Guinness index to the two exchange rates operating on the island, we can see that the sterling zone in this island economy is hugely undervalued vis a vis the euro zone. This is an opportunity for the Republic.
The average price of a pint in Dublin is €5.50; up the road, in central Belfast, the same pint will cost you £3.40 or €3.84. Therefore, the implied exchange rate from the Guinness Index is €1 = £0.62. Consequently, there is a gap of 30% between the financial market exchange rate and the Guinness exchange rate.
This means that, in Northern Ireland, sterling is massively undervalued against the Euro.
Over time, the theory says that sterling would rise against the euro if its path were determined only by economic conditions in Ireland.
But the euro vs. sterling exchange rate is not simply determined by events in Ireland. It is affected by world events. Therefore, sterling won’t rise against the euro materially.
As a result, there is a massive opportunity between the two zones of the all-island economy.
At these prices, it is an act of economic self-harm not to shop in the North. If you could do all your shopping in the North you could raise your disposable income by 30%.
The benefits to the whole country of using the North as a “constitutional Lidl” – a bargain basement a few miles up the road – would be huge.
Some retailers in the Republic, however, would almost certainly say that deserting the expensive South for the cheap North would destroy retail in the South. Granted, there would be some casualties, but it’s more likely that retail in the Republic would simply evolve.
Irish retail has never been destroyed by a 30% increase in the disposable income of the Irish consumer.
This is the sobering conclusion from the Pint of Guinness Index.